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Making some New Year’s resolutions? Read this very informative and timely article from Wall Street Journal on retiring.


New Year’s resolutions should not just be about losing a few pounds or learning a new language. They should also be about putting your retirement planning in order.

January offers the perfect opportunity to do so. Year-end financial statements are on their way, and they’ll provide a bird’s eye view of how investment strategies performed during the stock market’s decline and sharp rebound.

Also, tax season isn’t far off, so it’s a chance to get a jump-start on totaling up expenses and income that can help with long-term budgeting.

Against the backdrop of the hard economic times and losses that many investors have suffered in stock investments, here are some New Year’s resolutions for your retirement plan:

Start building a cash cushion. If you’re within three to five years of retirement, says Bill Losey, a financial planner in Wilton, N.Y., now is the time to start making sure you’ve got the cash on hand that you’re going to need to pay bills once you stop working.

The most recent bear market shows why. Anyone who planned to retire at the end of 2008 — and waited until then to sell investments and put aside the cash needed for routine expenses — would have been selling in the midst of the worst stock-market decline since the Depression. Even many bond investments lost value.

Mr. Losey says there’s no rule of thumb for the pace at which a person should convert part of an investment portfolio to cash. Variables include the size of the portfolio and whether the retiree will have a pension or other reliable income stream.

With “some people, I want to be sure and liquidate [enough to meet all income needs] right now,” he says, “and…for some people we say, ‘Let’s liquidate half today’ ” to cover expenses for the first three years of retirement.

Give your bond portfolio a risk check. Investors flocked to bonds in 2009, especially corporate and junk bonds. It turned out to be a great move. Many high-yield bond funds posted big gains.

Meanwhile, with rates on money-market funds essentially at zero, investors looking for additional income have been tempted to move money into higher-yielding longer-term bonds. But these bond investments carry the risk of losing value whenever interest rates start to rise.

While the Federal Reserve thus far isn’t signaling an imminent rate increase, many analysts believe when the Fed raises rates, it will do so quickly and not gradually.

That means taking a close look at how your bond investments will perform in a rising-rate environment — now.

“The problem is that people say, ‘If the market falls, we’ll take the money and do something else with it,’ but by the time you are cognizant of it, it’s usually too late and you end up with a big loss,” says Susan Kaplan, a financial planner in Newton, Mass.

She is suggesting to many retiree clients that they hold so-called bond ladders — portfolios of bonds that mature gradually over time — that mature in no more than five years and, thus, are less vulnerable to rising rates.

Add a different kind of diversification. The past two years provided a real-life stress test for retirement portfolios. Perhaps the biggest disappointment was the degree to which diversified portfolios suffered losses so steep that, even with the market bounce since the spring, many retirees still are in the hole.

The experience showed the shortcomings of what had become conventional wisdom about building diversified portfolios. In steep down markets, stocks of all kinds — U.S., international, growth, value — tend to fall in unison. Most stock mutual funds are inherently bad investments for bear markets because managers are forced, essentially, always to be bullish and be fully invested in stocks.

For investors, the resolution should be to do a better job of bear-proofing a portfolio. One way is to add asset-allocation funds, which allow managers to aggressively play defense. This can be done through owning gold or by profiting when stocks fall by selling them short, which involves selling borrowed shares in hopes of replacing them later at a lower price.

Scott Dauenhauer, a financial planner in Laguna Hills, Calif., has been complementing traditional buy-and-hold stock investments with funds such as Pimco All Asset All Authority, which allows the managers to short stocks and invest in other assets such as gold.

“Such a portfolio may lag…in an upturn where stocks become excessively overvalued,” he says, “but should come in handy during crashes like [those of] 2000 and 2008.”

Save money. It’s the most basic, but most important, resolution you can make. It’s also often the hardest to fulfill.

Lew Altfest, a financial planner in New York, suggests you pay yourself by writing a check or transferring money to an account you don’t usually use.

Mr. Altfest also sees a connection between saving and dieting: Tell your friends that you’re going to save a certain amount of money over the next six months. “In a way it’s like going to Weight Watchers” and talking about weight-loss goals in front of a group, he says. “You’re putting peer pressure on yourself.”